Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
THIS REPORT WAS PREPARED BY MATIAS PARIKKA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 1/35
MASTERS IN FINANCE
EQUITY RESEARCH
We initiate coverage on Cargotec with a Hold rating
and a YE15 target price of EUR 26.1 per share. The company
currently trades at 23.6 P/E ratio and we estimate YE 15 P/E to be
15.2 which is 2.7% above Cargotec’s peer group median of 14.8.
We see this to be justified valuation if Cargotec can maintain
recent improvements in Kalmar and Hiab segments and can turn
its struggling MacGregor segment around with newly initiated
efficiency program.
Key value drivers for Cargotec’s top line are development
of global trade and GDP, both of which look encouraging.
Segments are further driven by global ship building activity and
offshore exploration activity, container throughput, terminal
automation, truck registrations and construction activity. Most of
these indicators are pointing to healthy growth.
Leverage: Recent acquisitions in MacGregor segment
have increased Cargotec’s leverage to almost record highs.
Cargotec’s current D/E ratio is 54% while the company targets
below 50%. We expect Cargotec to reduce D/E ratio below its
target in the near future.
Valuation: Our YE15 target of 26.1 EUR per share is
based on discounted cash flow analysis. Our target implies 5.9%
total shareholder return potential from the current levels of 25.1
EUR.
Company description
Cargotec is a global manufacturer of cargo handling machinery for ships, ports, terminals, and local distribution. Cargotec was formed in 2005 when Kone Corporation was split into two companies to be listed. Cargotec has approximately 11000 personnel in over 100 countries and is listed in OMX Helsinki stock exchange.
CARGOTEC COMPANY REPORT
INDUSTRIALS 6 JANUARY 2015
STUDENT: MATIAS PARIKKA [email protected]
Improving results segment by segment
Expectations already reflected in current price
Recommendation: HOLD
Vs Previous Recommendation -
Price Target FY15: 26.1 €
Bloomberg ticker: CGCBV:FH
Price (as of 6-Jan-15) 25.1 €
Expected total shareholder return % 5.9%
52-week range (EUR) 20.57-34.67
Market cap (EUR million) 1619
Outstanding shares (million) 64.4
Enterprise value (EUR million) 2305
Average volume last 3 months (EUR million)
6.62
Source: Bloomberg
Source: Bloomberg
(Values in € millions) 2013 2014E 2015E
Revenues 3181 3223 3395
EBITDA 169 206 270
Net Profit 55 62 110
EPS (EUR) 0.9 0.96 1.71
P/E (x) 26.8 23.6 15.2
EV/EBITDA (x) 12.2 11.6 8.9
Net debt 585 717 739
Dividend yield % 1.6% 2.7% 2.0%
Dividend per share (EUR) 0.72 0.5 0.9
ROIC % 3.5% 5.2% 7.8%
Source: Analyst projections, Bloomberg
0
50
100
150
200
250
Cargotec Helsinki OMX 25
CARGOTEC COMPANY REPORT
PAGE 2/35
Table of Contents INVESTMENT CASE ............................................................................................... 3
WEAKNESS IN MACGREGOR ONLY TEMPORARY ................................................................... 3 GROWTH POTENTIAL IN SERVICES OFFERING ........................................................................ 3 TOP LINE GROWTH FROM TERMINAL AUTOMATION AND SUBSEA DRILLING ............................ 4 SHARE APPRECIATION POTENTIAL LIMITED AT CURRENT PRICES ............................................ 4
COMPANY OVERVIEW .......................................................................................... 5
COMPANY DESCRIPTION ....................................................................................................... 5 BUSINESS SEGMENTS ........................................................................................................... 6
MacGregor – Maritime and offshore ................................................................ 6 Kalmar – Ports and terminals .......................................................................... 6 Hiab – On-road load handling ......................................................................... 7
SALES SPLIT ........................................................................................................................ 8 SHAREHOLDER STRUCTURE .................................................................................................. 9 LEVERAGE POSITION ............................................................................................................ 9 COMPETITOR OVERVIEW .................................................................................................... 10
BUSINESS DRIVERS ........................................................................................... 12
DEVELOPMENT OF THE WORLD ECONOMY .......................................................................... 12 DEVELOPMENT OF THE WORLD TRADE ............................................................................... 12 DRIVERS IN MACGREGOR SEGMENT .................................................................................. 13
Global ship building activity .......................................................................... 13 Offshore exploration and production spending .............................................. 13
DRIVERS IN KALMAR SEGMENT.......................................................................................... 14 Global container throughput .......................................................................... 14 Terminal and port automation ........................................................................ 15
DRIVERS IN HIAB SEGMENT ............................................................................................... 15 Over 15 ton gross vehicle weight truck sales .................................................. 15 Construction activity ...................................................................................... 16
SEGMENTAL FORECASTS ................................................................................. 17
MACGREGOR: ORDER BOOK AND ACQUISITIONS POINT TO NEAR TERM SALES GROWTH ....... 17 KALMAR: GROWTH FROM CONTAINER THROUGHPUT AND AUTOMATION ............................. 19 HIAB: PROFIT IMPROVEMENT PROGRAMME PROCEEDS AS PLANNED .................................... 21
VALUATION .......................................................................................................... 22
CARGOTEC VS. INDUSTRY PEER GROUP ............................................................................... 22 WEIGHTED AVERAGE COST OF CAPITAL .............................................................................. 23
Cost of equity .................................................................................................. 23 Cost of debt ..................................................................................................... 23
CONSOLIDATED DISCOUNTED CASH FLOW VALUATION ....................................................... 24 Scenario analysis: MacGregor and oil price development ............................. 24
SUM-OF-THE-PARTS VALUATION ........................................................................................ 26 SENSITIVITY ANALYSIS ON WACC AND HORIZON GROWTH RATE ....................................... 26
APPENDICES ........................................................................................................ 28
APPENDIX 1: ACQUISITION HISTORY SINCE CARGOTEC WENT PUBLIC.................................. 28 APPENDIX 2: BETA CALCULATIONS .................................................................................... 29 APPENDIX 3: CONSOLIDATED FREE CASH FLOW PROJECTIONS (BASE CASE) ......................... 30 APPENDIX 4: SHARE PRICE TARGETS (BASE CASE) .............................................................. 30 APPENDIX 5: BENCHMARKING VERSUS INDUSTRY PEERS .................................................... 31
FINANCIALS ......................................................................................................... 32
RESEARCH RECOMMENDATIONS ...................................................................................... 35
CARGOTEC COMPANY REPORT
PAGE 3/35
Investment case
Weakness in MacGregor only temporary
Weakness in MacGregor’s profitability in the third quarter of 2014 was caused by
lower than average profitability in certain deliveries and additional 2.7 million
EUR depreciation related to new acquisitions. As a result of the weakness,
Cargotec initiated an efficiency programme that aims to improve profitability
through cost savings in R&D and design. Due to long order-to-delivery lead
times, MacGregor will still operate with unusually low margins in 2015 (7%)
because cost savings can’t be achieved with ongoing order deliveries. We expect
the programme to improve EBIT margin in 2016 once the current orders will be
delivered (see page 17).
Why are we confident that weakness in MacGregor is only temporary? First,
Cargotec has proofed that it has capability to turn segments around. Similar
efficiency programmes in Kalmar and Hiab segments are proceeding as planned
with 15 million EUR Y-o-Y EBIT improvement in Kalmar and 6.4 million EUR
improvement in Hiab segment achieved through cost savings in sourcing, pricing,
and spare parts. Second, weakness in MacGregor is driven by the weak
business cycle in merchant ship market and supply-demand imbalances are
expected to last until 2016. We expect MacGregor’s EBIT margin to stay at 7%
level in 2015, but to increase to 9% in 2016 and to 10% in 2017 through the
aforementioned efforts as well as fewer project cost overruns which were due to
the weak business cycle in merchant ship market.
Growth potential in services offering
There is growth potential in service offering development especially in Kalmar and
MacGregor segments. Cargotec has already shifted its business mix towards
services but currently the portion of sales that comes from services is rather low,
28% in Kalmar and 22% in MacGregor. Cargotec has made the growth in services
as one of the “must win battles” and targets the share of services to grow in
Kalmar and to be at least 30% of sales in MacGregor. As an example,
Konecranes (Cargotec’s competitor) has share of services roughly 40% of sales.
Currently, only about one-third of service market is outsourced to service
providers such as Cargotec. Outsourced maintenance is concentrated in
developed markets but share is growing in emerging markets too. Strengthened
by targeted acquisitions such as Mareiport, we expect share of services in
MacGregor and Kalmar to rise to 30% of total sales by 2018.
Weakness in MacGregor is mainly driven by the weak business cycle in merchant ship building market. This has caused lower than average profitability in certain deliveries.
Merchant ship building market is expected to recover in 2016, which will drive MacGregor’s sales and improve profitability.
Our target for MacGregor’s EBIT % for 2015 is 7% and 9% for 2016. Improvement will be achieved from cost savings in R&D and supply chain as well as better profitability in deliveries.
Currently, only about one third of the services is outsourced to service providers such as Cargotec. We believe that share of outsourcing will grow and that will increase service sales.
CARGOTEC COMPANY REPORT
PAGE 4/35
Terminal automation will support Kalmar’s growth in the future. Finding growth drivers in Kalmar is of high importance since the segment brings currently roughly 45% of the company’s sales.
Top line growth from terminal automation and subsea drilling
We see potential in terminal automation (Kalmar segment) and subsea drilling
sectors (MacGregor segment). While only recently starting to show revenue
growth potential, terminal automation is likely to be one of the key themes in the
terminal projects in the future with projected growth rates between 20-30% until
2018. High growth in terminal automation is driven by improved technologies,
increasing labour costs, and intensifying pressure of efficiency and sustainability.
Cargotec currently has capabilities to tap into this market with its offering in port
process automation, equipment automation, equipment control systems and
terminal operating systems. Acquisitions, such as terminal operating system
provider Navis in 2011, have strengthened Kalmar’s position in automated
terminals. Kalmar, supported by Navis acquisition, currently has around 20%
market share in terminal operating systems.1
Another interesting driver that likely supports the growth of Cargotec’s
MacGregor segment in the future is subsea drilling. Oil industry is starting to
increasingly explore subsea drilling and this is projected to increase exploration
expenditures from current 70 USD billion to more than 106 USD billion in 2020 –
8.7% estimated annual growth rate. This will drive MacGregor’s sales as it boosts
the demand for MacGregor’s lifting and intervention equipment. One caveat is the
oil price. Current mid-50’s USD oil price is barely above the break-even point that
deep water oil exploration and production needs.2 U.S. energy information
administration expects oil price (WTI crude) to average at 62.75 USD/bbl in
20153 which would be below upper end of break-even scale of ~75 USD/bbl but
above average breakeven point of ~55 USD/bbl. This indicates that current oil
price rout – if prolonged – could have adverse effect on MacGregor’s offshore
segment (see page 24 for oil price scenario analysis and its estimated effect on
MacGregor).
Share appreciation potential limited at current prices
Cargotec seems to currently trade close to its “fair value”. Our DCF valuation
gives Cargotec a YE 2015 target of 26.1 EUR and stock currently trades at 25.1
EUR. This means that based on our view, stock holds 5.9% total shareholder
return potential (including expected dividend payment of 0.53 EUR) at these
levels.
1 Cargotec capital markets day 18th November 2014, Kalmar presentation
2 Rystadenergy.com – global liquids cost curve
3 U.S. energy information administration
30% of MacGregor’s sales currently come from offshore market and new areas such as subsea drilling and exploration are expected to boost sales in the future.
CARGOTEC COMPANY REPORT
PAGE 5/35
0
50
100
150
200
250
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Cargotec Helsinki OMX 25
Figure 2, Cargotec share price development since listing
Source: Company data
Source: Company data, Bloomberg
1.6.2005 – 6.1.2015
Share price appreciation +0.5%
Total return (dividends re-invested) +32.2%
Annualized total return +3.0%
Company overview
Cargotec is a Finnish manufacturer and provider of cargo handling solutions with
operations in more than 100 countries worldwide. Cargotec employs
approximately 11000 people and had revenue of 3181 million EUR in 2013.4
Even though Cargotec has roots going back to 1970’s, company was officially
formed in its current form in 2005 when Kone Corporation was splitted into two
companies to be listed in Helsinki Stock Exchange. Cargotec is part of the OMX
Helsinki 25 index, which consists 25 of the most traded companies of Helsinki
Stock Exchange and currently has a market value of 1619 million EUR, which is
around 7% higher than the median (1513 million EUR) market capitalization of its
industry peers (See appendix 5). After its listing in June 2005, Cargotec’s share
price nearly doubled before 2007 financial crisis and subsequently lost more than
80% of its value during 2007-2009. Share price has since recovered but due to
the ups and downs it is currently trading at 25.1 EUR/share which is just 0.5%
higher compared to its listing price of 25 EUR/share. Re-investing dividends,
investors would have obtained 32.2% total return since listing. Compared to OMX
Helsinki 25 which is up 47% since June 2005, Cargotec’s share has drastically
underperformed the index.
Company description
Cargotec’s cargo handling products and services are used in ships, ports,
terminals, distribution centres, heavy industry and in on-road handling.
Manufacturing and sales of the equipment is only a part of Cargotec’s business,
Cargotec also provides its customers maintenance and services solutions.5
Revenue from services has become an important part of Cargotec’s business,
bringing in 24% of total consolidated sales in 2013.6 Cargotec in its current form
is a result of multiple acquisitions and company has engaged in series of M&A
deals since it went public in 20057. Aggressive acquisitions can be explained by
Cargotec’s strategy to grow faster than the industry on average where
acquisitions support rapid growth. Currently, Cargotec has three business
segments which are designed to serve the needs of different sectors worldwide.
Below is a brief introduction on each of the Cargotec’s business segments.
4 Cargotec 3rd quarter report October 23, 2014
5 Cargotec company data, www.cargotec.com
6 Cargotec annual report 2013
7 Full summary of Cargotec’s acquisitions since company went public can be found in Appendix 1
Source: Bloomberg
Figure 1, Company structure
CARGOTEC COMPANY REPORT
PAGE 6/35
Figure 3, MacGregor's offering
Figure 4, Kalmar's offering
Source: Company data
Source: Company data
Business Segments
MacGregor – Maritime and offshore
MacGregor segment serves maritime transportation and offshore industries with
diverse offering for ships, ports and terminals and offshore industry. Due to the
heavy capital intensity and slow dynamism of the maritime and offshore
industries, long lead times and dependency on world’s energy and ship building
markets characterises MacGregor’s business environment. Order-to-delivery lead
times in the MacGregor segment are very long, usually somewhere in between
12-24 months.8 During the first 9 months of 2014, MacGregor has taken over
Hiab as the second largest segment of Cargotec in terms of sales volume (733
million EUR vs. 629 million EUR). Currently, the offshore shipbuilding market is
shifting towards Asia, while the USA and Norway remain the main locations of
ship owners.9 The shift in east is apparent when looking at the MacGregor’s
sales figures, around 65% of MacGregor’s sales already came from APAC area
in 2013.10
To root its presence further in Asia, MacGregor has established
several joint ventures and partnerships in Asia. As an example, JV with Chinese
Jiangsu Rainbow heavy industries which was established in 2012 allows
Cargotec to better tap into Asian offshore market with the help of local partner.
Given the growth of APAC region and MacGregor’s increased focus there, we
expect region’s share of MacGregor’s sales to increase to 70% by 2017.
Kalmar – Ports and terminals
Kalmar is the largest segment of Cargotec generating 1034 million EUR of sales
during the first 9 months of 2014. Segment’s products and services consist of
container and cargo handling equipment, terminal and port automation and
related services. Main customer segments are ports and terminals, which Kalmar
serves globally. Another important customer segment is logistics and industrial
applications which are currently served only in selected geographical markets,
mainly in the USA and Europe. Extremely important aspect in Kalmar’s business
is maintaining impeccable customer relationships. This is due to the fact that the
top 22 companies handle around 75% of the world’s container traffic and operate
around 40% of all terminals. This sort of consolidation in the industry means that
customer relationships are long term and losing a customer can mean losing a
substantial chunk of the business. In terms of market drivers, the main driver of
8 Cargotec’s Q2 2014 investor presentation
9 MacGregor, markets and market outlook, www.cargotec.com
10 Cargotec’s Q2 2014 investor presentation
Order to delivery lead times in MacGregor segment are long, between 12-24 months
CARGOTEC COMPANY REPORT
PAGE 7/35
Figure 5, Hiab's offering
Source: Company data
Kalmar’s business is the development of the world trade as it is the main driver
behind ports and terminals activity. Other main top line drivers are the world
container traffic and terminal automation.11
In terms of Kalmar’s sales split by
geography, EMEA is the main market for Kalmar bringing in 48% of the sales in
2013. Americas is the second largest market with 27% share. APAC region is
responsible of 25% of the sales and remains a challenging area due to the
competition especially in ship-to-shore cranes, RTG/RMG cranes and
reachstackers. APAC region is responsible for most of the projected growth in
container throughput going forward. Kalmar has strengthened its presence in the
area by joint ventures and new product introductions. As an example, Kalmar
introduced its new generation Gloria reachstacker in the region in August 2014.12
We expect future growth in the APAC area for Kalmar but remain also positive
about the growth in the U.S. due to the economic recovery in the area. Order-to-
delivery lead times in Kalmar segment are substantially shorter than in
MacGregor segment, somewhere between 6-9 months.13
Hiab – On-road load handling
Hiab segment’s products are used in on-road transport and delivery. Customers
range from large national or regional companies to local and relatively small
enterprises which include transportation companies, governments, fleet
operators, single truck owners and truck manufacturers. Given that, Hiab’s
business is characterised by a high number of individual and small orders. This
makes lead times from order-to-delivery relatively short compared to Cargotec’s
other business segments, only 2 to 4 months in general. Majority of customers
are located in EMEA and 52% of sales in 2013 came from the region. Second
largest market region is Americas with 36% of sales. Only 12% of the sales come
from APAC region. To improve APAC’s sales, Hiab established a joint venture
with China’s leading truck manufacturer, China National Heavy Duty Truck Group
Co which was kicked off in May 2014. We expect this partnership to increase
sales in China, which currently has only 2% share of Hiab’s sales with 13.6
million EUR in sales in 2013. We expect sales in China to rise to 30 million EUR
by 2017.
11
Kalmar, markets and market outlook, www.cargotec.com 12
Cargotec press release, 26 August 2014 13
Cargotec’s Q2 2014 investor presentation
Order to delivery lead times in Kalmar segment are between 6-9 months.
Order to delivery lead times in Hiab segment are short, between 2-4 months.
CARGOTEC COMPANY REPORT
PAGE 8/35
42%
28%
30%
EMEA Americas APAC
26%
43%
31%
Hiab Kalmar MacGregor
44%
25%
31%
EMEA Americas APAC
0%
10%
20%
30%
40%
50%
60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 9m 2014
EMEA Americas APAC
Figure 6, Sales by region 2013
Figure 10, Sales by segment 9m 2014
26%
49%
25%
Hiab Kalmar MacGregor
Figure 9, Sales split development by region
Source for figures 6-10: Company data
Source: Company data
Sales split
On a consolidate level, most of the Cargotec’s sales in 2013 (44% in 2013) came
from Europe, Middle East, and Africa (EMEA). This is because Hiab and Kalmar
segments are generating most of the sales and their main market is EMEA.
Second largest market in 2013 was Asia Pacific that generated 31% of the sales.
The rest, around 25% of the sales came from Americas. Sales split has
developed in the recent years. The share of EMEA from the total sales has
decreased from 56% in 2005 to current 42% in Q1-Q3 2014. At the same time,
the share of APAC region has increased from 15% in 2005 to 30% in Q1-Q3
2014. Share of Americas is currently at the same level as it was in 2005, but has
rebounded from its lowest point of 16.5% in 2008 to current 28% in Q1-Q3 2014
as U.S. has recovered from financials crisis of 2008-2009.
In terms of segment sales, Cargotec’s most important segment is Kalmar which
produced 49% of the sales in 2013 and is expected to generate around 45% in
2014. Hiab segment accounted for another 26% and MacGregor segment the
remaining 25% in 2013. It should be noted that the importance of MacGregor
segment is growing. With recent acquisitions of Hatlapa, and Aker solutions’
mooring system unit (Pusnes) MacGregor will increase its share in the sales split.
In Q3 2014 alone, newly acquired businesses contributed sales increase of 61
million EUR into MacGregor segment (24% of the segment sales). Hence,
MacGregor’s share of business is becoming larger already in 2014. During the
first 9 months of 2014, MacGregor surpassed Hiab as the second largest
segment contributing 31% of total sales versus 26% that Hiab contributed.
Figure 8, Sales by region 9m 2014
Figure 7, Sales by segment 2013
CARGOTEC COMPANY REPORT
PAGE 9/35
16%
24%
14% 12%
11%
18%
5%
Nominee registered
Finnish institutions, companies, and foundations
Ilkka Herlin
Niklas Herlin
Ilona Herlin
Finnish households
Non-Finnish shareholders
Figure 12, Net debt & D/E
Figure 13, Net debt & net debt/EBITDA
Source: Company data
Source: Analyst projections, Company data
Source: Analyst projections, Company data
0%
20%
40%
60%
80%
100%
120%
0
100
200
300
400
500
600
700
800
900
Net debt D/E (RHS)
0
1
2
3
4
5
6
0
100
200
300
400
500
600
700
800
900
20
06
A
20
07
A
20
08
A
20
09
A
20
10
A
20
11
A
20
12
A
20
13
A
20
14
E
20
15
E
20
16
E
20
17
E
20
18
E
Net debt Net debt/EBITDA (RHS)
Shareholder structure
As mentioned earlier, Cargotec was formed when Kone Corporation demerged
into two companies to be listed. Having said that, Cargotec’s stock is still widely
held by the Kone’s founding family members – Herlin. Herlin family collectively
owns around 36% of the Cargotec, with Ilkka Herlin having the largest share of
about 13.6%. Second largest owner group is Finnish institutions, companies and
pensions funds which hold around 24% of the stock. In total, institutions and
founding family hold around 60% of Cargotec’s shares. 16% of the stock is
owned by nominee registered, which means shares that are held electronically in
the account of stock broker or other custodian. Finnish households own around
18% of Cargotec’s stock and the rest 5% is owned by non-Finnish owners. As
can be seen, the ownership structure is rather heavily tilted towards institutional
and family ownership. 14
Leverage position
Cargotec has announced that its goal is to keep net debt/equity ratio below
50%.15
In Q3 2014 company sporting a rather high ratio of 54%, which is mainly
due to the acquisitions in the MacGregor segment. In Q2 2013 it acquired
merchant ship and offshore deck equipment provider Hatlapa for 160 million
EUR, in Q3 2013 it acquired mooring and loading system unit of Aker solutions
for 180 million EUR, and in Q1 2014 Cargotec bought Deep Water Solutions AS.
Mainly as a result of these acquisitions, Cargotec’s net debt has increased from
494 million EUR in 2012 to 859 million EUR in Q3 2014. D/E levels have
increased from 25% in 2011 to 54% in Q3 2014. Company is aiming to reduce
debt levels and we are expecting net debt/equity ratio to decline to 43% level
going forward.
Additional way to assess current leverage position is to take a look at the net
debt/EBITDA ratio16
. As can be seen from the figure 13, net debt/EBITDA ratio
has been fluctuating a lot in recent years and was 3.5x in 2013. In 2014, ratio is
expected to stay at 3.5x due to the acquisitions in MacGregor segment. In our
view, currently high net debt/EBITDA ratio is likely to be temporary. We expect
net debt/EBITDA ratios slowly decline to 2.3x by 2018. Still, compared to its
peers’ median Net debt/EBITDA ratio of 1.2, Cargotec’s net debt/EBITDA ratio is
substantially higher. Moreover, as can be seen from figure 15, Cargotec’s
14
Company data, www.cargotec.com 15
Cargotec’s long term financial targets, www.cargotec.com 16
Net debt defined as interest bearing debt – excess cash and cash equivalents
Figure 11, Shareholder structure
CARGOTEC COMPANY REPORT
PAGE 10/35
Figure 14, Net debt/EBITDA ratios of industry peers
Source: Analyst projections,Marketnoze, Bloomberg
Source: Analyst projections, Bloomberg, S&P
Figure 15, EBIT interest coverage of industriy peers
Source: Analyst projections, Marketnoze, Bloomberg
interest coverage ratio is substantially lower than the level of its peers’, which
further indicates that Cargotec currently does not have room to increase its debt
level in order to keep its interest payment at the reasonable level compared to its
profitability. We expect Cargotec’s EBIT interest coverage level to improve
reaching 4.2 in 2018.
In order to assess Cargotec’s credit quality further, below table 1 shows four
common debt servicing ratios that credit rating agencies follow when assessing
the ability of the borrower to service debt. When compared to S&P’s benchmarks
for credit ratings, it can be seen that EBIT interest coverage and EBITDA interest
coverage in 2015E indicate credit rating of BB, FCF to total debt indicates BB but
is expected to rise substantially close to BBB criteria. Finally total debt to EBITDA
also indicates rating of BB. Cargotec does not currently have official credit rating
but it can be seen that Cargotec’s credit rating would most likely be currently BB
to BBB.
Table 1, Cargotec’s debt servicing ratios and S&P criteria
Ratio 2014E 2015E 2016E 2017E 2018E
EBIT interest coverage 2.3 3.4 4.0 4.0 4.2
EBITDA interest coverage 3.7 4.7 5.3 5.3 5.4
FCF/total debt 3.3% 12.7% 14.2% 14.2% 15.3%
total debt/ebitda 4.6 3.6 3.2 3.2 3.2
Ratios and criteria AAA AA A BBB BB B CCC
EBIT interest coverage 23.8 19.5 8 4.7 2.5 1.2 0.4
EBITDA interest coverage 25.5 24.6 10.2 6.5 3.5 1.9 0.9
FCF/total debt 127.6% 44.5% 25.0% 17.3% 8.3% 2.8% -2.1%
Total debt/EBITDA 0.4 0.9 1.6 2.2 3.5 5.3 7.9
Competitor overview
Carogtec’s competitive landscape is diverse and segment specific. MacGregor’s
competitors are mainly industry behemoths such as Mitsubishi Heavy industry and
Rolls-Royce and most of these giants are diversified into many different industries.
Competitors such as TTS group and Rolls-Royce are experiencing the current
challenging market environment. Due to the offshore market pressures, TTS has
been performing poorly in recent quarters with barely positive EBITDA margin in
Q3 2014 after four consecutive negative EBITDA quarters.17
Rolls-Royce is
guiding around 10% reduction in the revenue of its marine segment and 15-25%
reduction in profit for 2014.18
This is indicative of the current situation in the marine
and offshore cargo handling equipment business environment.
17
TTS Group Q3 2014 quarterly presentation 18
Rolls-Royce guidance update and medium term oulook, 17 October 2014
CARGOTEC COMPANY REPORT
PAGE 11/35
Figure 16, Key competitors by segment
Source: Company data, Bloomberg
Source: Analyst projections, company data
Source: Analyst projections, company data
Source: Analyst projections, company data
In contrast to MacGregor, Kalmar’s key competitors are more focused. As can be
seen from table 3, closest to Kalmar’s product offering are ZPMC, Konecranes
and Terex. Together with Cargotec, Konecranes and Terex are top three players
in port cranes globally. Kalmar is market leader in spreaders, automation solutions
and dry bulk handling systems. In addition to the key competitors, market has lots
of competition from small and local suppliers so the industry is still very
fragmented and poised for consolidation19
which can also explain Cargotec’s
extensive acquisition history.
Smaller and private companies characterise Hiab’s key competition. The main
competitor is Austria’s Palfinger that has offering similar to Hiab. Palfinger has a
market value of 789 million EUR and revenue of 981 million EUR in 2013 so the
company is roughly the size of Hiab in terms of sales. Hiab is strong especially in
Knuckle-boom cranes with 50% market share, Palfinger being second with around
30% share. 20
Hiab’s other key competitors are private and and they compete only
in one or two product area with Hiab so Hiab’s market is fragmented as well.
19
Hoist magazine article ”The biggest step of all”, www.hoistmagazine.com 20
Palfinger company data, www.palfinger.ag
Table 3, Kalmar: key competition by product area
Table 2, MacGregor: key competition by product area
Table 4, Hiab: key competition by product area
CARGOTEC COMPANY REPORT
PAGE 12/35
0.0 %
1.0 %
2.0 %
3.0 %
4.0 %
5.0 %
6.0 %
2013 2014 2015 2016 2017 2018 2019
Growth of world trade, current prices % change
0%
5%
10%
15%
2013 2014 2015 2016 2017 2018 2019
GDP forecast, current prices (USD) % change
World
European Union
ASEAN-5
Middle East and North Africa
Sub-Saharan Africa
China
United States
Business drivers
Due to the Cargotec’s offering that serves worldwide clientele and the nature of
the cargo equipment industry, demand for Cargotec’s products and services is
dependent of the world trade and cargo handling needs in land and sea. Hence,
the main general global macroeconomic drivers of Cargotec’s business include
the development of the world trade and growth of the global GDP both of which
can point the direction of future top line development.21
Development of the world economy
According to the IMF, the global economy is forecasted to grow in nominal terms
around 3.9% in 2014, and 5.1% in 2015. Emerging economies are collectively
expected to grow 4.7% in 2014 and 7.1% in 2015. The USA is expected to grow
3.9% in 2014 and 5.0% in 2015. Growth in European Union is expected to be
more moderate, 5.1% in 2014 and 2.6% in 2015. China is expected to grow 9.4%
in 2014 and slow down a bit to 9% in 2015. It should be noted that these figures
are nominal, which means they don’t take inflation into account22
. GDP
measurement used was in USD.
Given relatively strong development outlook of the world economy, this should be
favourable to Cargotec and support the business environment going forward.
However, investors should be cautious about rather slow growth in Europe, as
EMEA currently represents 42% of Cargotec’s sales.
Development of the world trade
The development of the world trade seems also to be favourable for Cargotec.
According to the IMF, world trade is expected to grow 3% in 2014, 3.8% in 2015,
and accelerate to 5.5% growth by 2019. This bodes well to Cargotec since cargo
business and especially Kalmar segment, which is Cargotec’s biggest segment,
is driven by the development of the world trade.
Growth of the world’s GDP and the development of the world trade are two “big
picture” drivers driving Cargotec’s business. In addition to this, it is possible to
identify more specific growth drivers for each of the three segments. Making
projections to segment specific drivers is crucial in order to make detailed
forecasts for the sales growth and profitability.
21
Cargotec’s operating environment, www.cargotec.com 22
According to IMF, world inflation is expected to be 3.8% in 2014, 3.9% in 2015, 3.8% in 2016, and 3.6% in 2017.
Figure 17, GDP forecasts
Figure 18, growth of world trade
Source: IMF
Source: IMF
CARGOTEC COMPANY REPORT
PAGE 13/35
0%
2%
4%
6%
8%
10%
0
200
400
600
800
1000
1200
1400
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
F
Fleet, year end
Fleet growth % (RHS)
Figure 19, Global fleet growth
Figure 20, Global orderbook % of fleet
0
1000
2000
3000
4000
5000
6000
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
F20
15
F20
16
F20
17
F20
18
F
Figure 21, contracting no. of ships
0
500
1000
1500
2000
2500
3000
3500
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
F20
15
F20
16
F20
17
F20
18
F
0%
10%
20%
30%
40%
50%
60%
Orderbook % of fleet
Drivers in MacGregor segment
Global ship building activity
As MacGregor offers cargo flow solutions to maritime transportation and offshore
industries, segment is largely driven by global ship building with merchant
shipping equipment contributing roughly 50% of the segment sales. According to
Clarkson Research, the global ship fleet growth peaked at 7-9% between 2006
and 2010 and is now starting to slow down, being around 4% in 2014.23
Order
book of new fleets peaked at 2009 with 51% of the existing fleet. At the beginning
of 2013 order book was only 16% of the existing fleet. As the ship building cycle
from order to delivery lasts from 13 months up to 26 months24
, order book in
2013 can be used to get a glimpse of the fleet growth until 2015. As order book in
2013 declined from 25% in 2012 to 16% of the fleet in 2013, we expect global
fleet growth to decline to 3% in 2015 from 4% in 2014. China is currently holding
the largest order book with more than 30 million CGT (compensated gross
tonnage). South-Korea and Japan come behind China with order books of 25 and
14 million CGT, respectively. 25
Furthermore, as can be seen from the figures 21 and 22 contracting of new ships
peaked in 2007 and subsequently ship deliveries peaked in 2010. After 2010,
number of ship deliveries has collapsed and the growth of deliveries is not
expected to pick up until 2016. After this overcapacity phase, number of ship
deliveries is expected to grow roughly 3-5% per annum. All of this means that
based on the ship building forecasts, MacGregor’s sales are set to grow only
modestly until 2016 and getting support from the recovering market from 2017
onwards.
Offshore exploration and production spending
In addition to the global ship building activity, global offshore exploration and
production spending is a key driver for MacGregor segment with offshore
contributing roughly 30% of the segment sales. According to research house
Douglas-Westwood, Offshore drilling expenditures are projected to increase
substantially until 2020. This increase is largely driven by subsea exploration.
Offshore exploration expenditures are expected to reach 106 USD billion in 2020.
Compared to current 70 USD billion this means 8.7% annual growth.26
Global
23
Clarksons research, shipping market overview, October 2, 2013 24
Carnegie capital goods seminar, Cargotec presentation, March 6, 2014 25
Seasecurity.org 26
Douglas-Westwood, global offshore prospects, September 26, 2013
Figure 22, no. of deliveries of ships
Source for figures 19-22: Clarkson research, company data
CARGOTEC COMPANY REPORT
PAGE 14/35
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
2012 2013 2014 2015 2016 2017
EMEA AMER
APAC Growth rate RHS
Figure 25, Global container throughput (TEU ‘000)
0
20
40
60
80
100
120
break-even range average break-even
Figure 24, break-even points for non-producing assets (USD/barrel)
0
10
20
30
40
50
60
70
80
Offshore Capex expenditure (USDbillion)
energy prices have a direct impact on E&P spending and capex expenditure in
the industry. Hence, recent decline in oil price has without a doubt an impact but
the average breakeven level for deep water projects is 54 USD/bbl. Current oil
price of ~55 USD/bbl is roughly at the average breakeven rate and U.S. Energy
Information Administration is expecting WTI crude to trade at 62.75 USD/bbl in
201527
. This means that investors need to be cautious. Upper range of
breakeven in deep water projects is around 75 USD/bbl which means that some
projects are not profitable with current and forecasted oil price. Consequently, we
expect this to impact negatively on offshore E&P activities in the near future and
provide only 1-2% boost to MacGregor sales until 2018. All in all, we expect
global ship building to provide MacGregor 2-3% growth until 2018 while global
offshore exploration and production spending is expected to support the growth
in sales with additional 1-2% until 2018. We provide more detailed forecasts on
sales and EBIT in the next section.
Drivers in Kalmar segment
Cargotec’s Kalmar segment offers cargo handling solutions and services to ports,
terminals, distribution centres and heavy industry. This means that for Kalmar, in
addition to growth of the global GDP which is a big driver behind activities in
ports and terminals, the main drivers of revenues come from global container
traffic as well as from the automation of terminals.
Global container throughput
Global container throughput is important driver for around 70% of Kalmar’s
business operations.28
In ports and terminals, containers and goods are
transported and moved by cranes, carriers, reachstackers and container
handlers, and Kalmar has offering in these areas. As can be seen from the figure
25, global container throughput is expected to grow relatively rapidly until 2017.
Growth between 2014 and 2017 is expected to vary from 4 to 7.9% and bulk of
the global container throughput is in APAC region, leaving Americas and EMEA
only a minority share of the throughput. Growth in the global container throughput
means that tailwinds are likely blowing Cargotec’s Kalmar segment in the future
and we expect this to contribute to the sales growth 2% in 2015, 3% in 2016 and
4% in 2017.
27
U.S. Energy information administration 28
Cargotec’s Q2 2014 investor presentation
Source: Douglas Westwood, company data
Source: Drewry shipping consultants, Company data
Figure 23, Offshore capex expenditure
Source: Douglas Westwood
CARGOTEC COMPANY REPORT
PAGE 15/35
0%
5%
10%
15%
20%
25%
30%
35%
0.0 €
0.2 €
0.4 €
0.6 €
0.8 €
1.0 €
1.2 €
2010 2012 2016 2018 2020
Total market Growth (RHS)
Figure 26, Global automation market (equipment, systems, and processes) EUR bn
Figure 27, Truck sales GCW over 15 tons
Terminal and port automation
Another important development that is driving Kalmar is the automation of ports
and terminals. Due to the improved technologies, increasing labour costs, and
intensifying pressures for efficiency and sustainability, automation in the ports is
expected to be one of the main themes in the industry in the future. Currently,
only about 40 ports out of thousand ports are automated to some degree which
means that there is a lot of growth potential going forward. As can be seen from
the figure 26, according to Drewry shipping consultants, global port automation
market is expected to go through a substantial growth period at least until 2020.
Kalmar has recently won important orders in terminal automation. In September
2014, Kalmar won equipment automation contract worth 40 million EUR in
Melbourne.29
Another important milestone was winning a contract to provide
Kalmar SmartStack solutions at Durban container terminal in South Africa in
November 2014.30
Currently Navis (part of Kalmar) has a 20% market share in
terminal operating systems which represents roughly 20% share of the whole
automation market. Since the automation market is still relatively small with less
than 1 billion EUR until 2018, we expect terminal and port automation to boost
Kalmar’s sales 2% annually (roughly 30-35 million EUR growth) during 2015-
2017.
Drivers in Hiab segment
As Hiab segment is focused in on-road load handling solutions and its offering
consists of equipment such as loader cranes, forklifts and tail lifts, the main
drivers of the business is the amount of truck sales and registrations and
construction industry activity. 31
Over 15 ton gross vehicle weight truck sales
As can be seen from the figure 27, level of truck sales is set to increase until
2016 in every market area. Truck sales are highest in APAC region where sales
of over 15 tons gross vehicle weight trucks is expected to reach 1 million by
2016. Sales in EMEA and Americas are expected to be around 400000 trucks
until 2016. Figure 28 presents projected growth in truck sales. As can be seen,
sales growth is not very stable, and can change quickly according to factors such
as economic development. Truck sales are expected to grow in 2015 in each of
29
Cargotec press release, 3 September, 2014 30
Cargotec press release, 17 November, 2014 31
Cargotec Q2 2014 investor presentation
Source: Drewry shipping consultants
Source: IHS global insights, company data
CARGOTEC COMPANY REPORT
PAGE 16/35
0
100
200
300
400
500
600
700
800
900
EMEA AMER APAC
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Figure 28, Truck sales growth GCW over 15 tons
the market areas. In 2016, sales are expected to grow in APAC and EMEA
regions.
Construction activity
Another important driver of Hiab’s business is the development of construction
activities since construction activities require smaller cranes and lifting
equipment. As can be seen from the figure 29, total construction output has been
declining rather substantially in EMEA from 2008 to 2013. 2014 is expected to be
the first year when construction output is estimated to grow and growth is
expected to continue until 2016. Total construction output in Americas has also
declined but it bottomed earlier than in EMEA. Growth in Americas resumed in
2012 and is expected to continue until 2016. APAC area is again one of the
strongest growers in total construction output. As can be seen, APAC has grown
rapidly since 2005 and total output has already surpassed that of EMEA and
Americas. All in all, the declines we have seen in EMEA and Americas should be
over and total construction output is expected to grow in every market area. This
should provide support to Hiab’s business going forward. Especially encouraging
is the resuming growth in EMEA which is the Hiab’s largest market area.
Favourable macro drivers should support Hiab’s sales growth in the future. We
expect Hiab’s sales to grow 2% in 2015 and 4% in 2016 due to the growing
construction output and truck sales globally. Hiab has also started to show more
effort to grow its presence in emerging markets and has launched for example
new stiff-boom cranes developed exclusively for Chinese market which will
support the Sinotruk-Hiab joint venture in China as it will be sold through both
Hiab and JV’s sales network. As mentioned earlier, currently only 12% of Hiab’s
sales come from APAC. We expect APAC’s share to reach 20% by 2017 which
would bring 5% growth rate in sales in 2017.
Figure 29, Total construction output (EUR bn)
Source: IHS global insights, company data
Source: Oxford economics, company data
CARGOTEC COMPANY REPORT
PAGE 17/35
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
200
400
600
800
1000
1200
1400
Sales EBIT margin %
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
50
100
150
200
250
300
350
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
14Q3
Sales m€ EBIT margin %
Figure 30, Quarterly sales MEUR and EBIT margin %, MacGregor
Figure 32, Annual sales MEUR and EBIT margin %, MacGregor
0
200
400
600
800
1000
1200
1400
1600
1800
MacGregor orders received
Segmental forecasts
MacGregor: Order book and acquisitions point to near term sales
growth
MacGregor’s sales in Q3 2014 were 255 million EUR which was 28% higher
compared to Q3 2013. This was supported by Hatlapa and Pusnes acquisitions as
the contribution of the acquired businesses to sales in Q3 was 61 million EUR,
which represents roughly 24 % of MacGregor’s total sales. Q1 – Q3 sales have so
far been 27% higher than during the same period in 2013 and new orders have
grown 39% indicating increasing sales in the segment for 2015 and early 2016.
Despite of growth in sales and orders, there are reasons to be worried and we
would like to highlight the following passage from Q3 2014 report: “Uncertainty
increased in MacGregor’s market during the autumn”. This is mainly due to the
imbalances of supply and demand in the ship market which is projected to take
until 2016 to balance. Despite of this uncertainty, the market for offshore cargo
handling equipment remained stable and deep sea production and its lifting
equipment needs are expected to grow as mentioned in the previous chapter. As
the order book has grown during 2014, long lead times (12-24 months) in
MacGregor segment mean that 2015 and first half of 2016 are set to be strong in
terms of sales. Consequently, due to near term supportive order book and boost
from acquisitions we remain positive in the near term and expect sales in 2014 to
grow 19% to 993 million EUR. As figure 32 points out, we expect sales to improve
strongly in 2015 and grow 10% supported by current order book. In 2016, we
expect sales growth to slow to 4% due to the slowdown of the ship building market
and expect this cycle to hinder MacGregor’s sales in 2017 and 2018 to 3% sales
growth in both years.
What is also alarming in the segment is the decline of the EBIT margin. As can be
seen from the figure 30, MacGregor’s EBIT margin has declined from 16% in 2011
to current 2.9% in Q3 2014. This decrease in EBIT is partly due to the recent
acquisitions which have increased depreciation, weighing down the EBIT margin.
Without the acquisitions, EBIT margin would have been 3.9% in Q3 2014. In any
case, EBIT margin has mainly declined as a result of lower than average
profitability in certain orders of the segment. Cargotec initiated a reorganization
Figure 31, MacGregor orders history, MEUR
Source for figures 30-32: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 18/35
Source: Cargotec London road show Q2 2014 presentation
Figure 34, MacGregor's operating invested capital (MEUR) and ROIC %
0
100
200
300
400
500
600
700
0%
10%
20%
30%
40%
50%
60%
20
06
A
20
07
A
20
08
A
20
09
A
20
10
A
20
11
A
20
12
A
20
13
A
20
14
E
20
15
E
20
16
E
20
17
E
20
18
E
Operating invested capital
ROIC %
WACC %
programme that aims to improve sales, services and procurements and increase
the emphasis on customer orientation.32
As a result of weak profitability during the
first 9m of 2014, we expect EBIT margin to be 5% in 2014 and improve slightly to
7% in 2015. As mentioned earlier, EBIT % in 2015 will still be weak because cost
savings can’t be achieved with current orders. After that, we expect MacGregor to
have potential to improve its EBIT margin substantially through cost savings in
R&D and supply chain as well as fewer project cost overruns which were due to
the weak business cycle with EBIT % expectation of 9% in 2016, 10% in 2017 and
11% in 2018.
Table 5 provides a summary of our projections of MacGregor’s free cash flow in
the coming years. As can be seen, after highly negative free cash flows in 2013
and 2014, which were mainly caused by the higher capital expenditures
associated to segment’s acquisitions our expectation is that free cash flow will
resume being positive in 2015 onwards with 63 million EUR in 2015. MacGregor
has a lean organization structure where design & engineering is partly outsourced,
manufacturing of the equipment is entirely outsourced and installation and after
sales services are partly outsourced. Only function that MacGregor takes care
entirely is marketing and sales which do not require heavy fixed costs. Lean
organization structure means that capital expenditures in the segment are low
which translates into higher levels of free cash flows.
Table 5, MacGregor free cash flow & income statement forecast
MacGregor, free cash flow map, MEUR 2013A 2014E 2015E 2016E 2017E 2018E
NOPLAT 47 38 56 76 87 99
Depreciation, amortization and impairment (+) 6 9 13 13 13 13
Gross free cash flow 53 47 69 89 100 112
Capex (-) 96 168 15 15 15 15
Change in NWC (-) 75 -28 -9 0 0 0
Free cash flow -118 -93 63 74 85 97
MacGregor, Income statement MEUR 2013A 2014E 2015E 2016E 2017E 2018E
Total sales 794 993 1092 1136 1170 1205
Operating expenses -725 -934 -1005 -1022 -1041 -1061
EBITDA 69 60 87 114 129 145
Depreciation, amortization and impairment -7 -9 -13 -13 -13 -13
EBIT excluding restructuring costs 63 50
74 101 116 132
32
Cargotec Q3 quarterly report, 23 October 2014
Figure 33, MacGregor's organization structure driving low capex
Source: Analyst projections, company data
Source: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 19/35
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
0
50
100
150
200
250
300
350
400
450
500
11
Q1
11
Q2
11
Q3
11
Q4
12
Q1
12
Q2
12
Q3
12
Q4
13
Q1
13
Q2
13
Q3
13
Q4
14
Q1
14
Q2
14
Q3
14
Q4
E
Sales m€ EBIT margin %
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
200
400
600
800
1000
1200
1400
1600
1800
Sales m€ EBIT margin %
Figure 35, Quarterly sales and EBIT margin %, Kalmar
Figure 36, Annual sales and EBIT margin %, Kalmar
0
200
400
600
800
1000
1200
1400
1600
1800
Kalmar orders received
Figure 37, Kalmar order history
Kalmar: Growth from container throughput and automation
Kalmar’s Q3 2014 sales were also relatively strong with 9% Y-o-Y increase from
354 million EUR to 385 million EUR. However, if looking at the first 9 months of
2014, sales in Kalmar are still behind 2013 level. Sales in Q1 – Q3 in 2014 were
1034 million EUR whereas at the same time year earlier they were 1082 million
EUR - 4 percentage decline. Decline is due to a weak first half of 2014, especially
second quarter sales were extremely weak with -20% decline YoY which was
simply due to lower project deliveries than during comparison period33
. Due to the
weak first half of the 2014, Kalmar’s 2014 sales (1385 million EUR) are set to be
weaker than in 2013 (1550 million EUR).
Order intake has been rather brisk and Kalmar’s orders received grew 4% YoY in
Q3 2014 to 380 million EUR. Order intake for the first 9 months in 2014 has been
higher than last year, with orders received growing 3% to 1104 million EUR.
According to 3rd
quarterly report in 2014, demand has been brisk especially for the
terminal tractors and forklift trucks. Due to the Kalmar’s relatively fast order-to-
sales lead times (6 to 9 months), this will support our expectation of sales growth
and these increased orders will be turned into sales already in 2015.
Consequently, we expect Kalmar’s sales to grow 4% in 2015. As the growth in
container throughput is expected to accelerate in 2016 and 2017 with growth rates
of 6% and 8%, this will be supportive to Kalmar’s sales. In addition, growth in
terminal automation is expected to be at its peak in 2016 and 2017. Consequently,
we expect sales to grow 5% in 2016 and 6% in 2017.
Kalmar’s EBIT margin has started improving in Q3 2014 after a disastrous Q2
2014. EBIT margin in Q3 was 8% whereas in Q2 it was -6% which was largely
caused by the cost overruns of 39 million EUR in the old projects. Kalmar still
suffered from these overruns in Q3 2014 but only worth 3 million EUR and
according to Cargotec these projects were finalized in Q3. As the cost overruns
were “only” 3 million EUR, profit improvement program that Cargotec initiated
earlier in its Kalmar and Hiab segments started to pay off in visible way in Q3
through cost savings in supply chain, sourcing, sales and service network, pricing
and spare parts. As for the expectations, EBIT margin in 2014 will be 4% (weighed
down by the earlier cost overruns) and climb higher to 7% in 2015 and 2016 as
the results of the efficiency program will be seen without further cost overruns.
33
Cargotec Q2 2014 quarterly report, 18 July 2014
Source: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 20/35
01002003004005006007008009001000
0%2%4%6%8%
10%12%14%16%18%20%
Operating invested capital
ROIC %
WACC %
Table 6 provides an overview of our projections to Kalmar’s free cash flow until
2018. Kalmar’s free cash flow was 90 million EUR in 2013, and is expected to be
positive until 2018. Out of the Cargotec’s three segments, Kalmar has clearly
highest capital expenditures. This is due to the fact that Kalmar is running its own
production facilities and has not outsourced its functions as much as MacGregor
for example. As an example, Kalmar produces its reachstackers and empty
container handlers in its factory in Poland (factory shared with Hiab segment), and
forklift trucks in Sweden.34
Running own production sites means higher capital
expenditures than outsourcing manufacturing. Kalmar’s capex is hence projected
to be at 55 million EUR level per annum due to the required investments in
property, plants and equipment. Moreover, as can be seen in figure 38, Kalmar
has operated with lower returns on invested capital (ROIC %) than WACC for the
whole 2010s up until now. Essentially this means that instead of creating value,
Kalmar has destroyed value and is not expected to start to “create” value until
2015. Kalmar’s low returns on invested capital are due to the large amounts of
assets such as fixed assets that are invested into its business.
Table 6, Kalmar free cash flow & income statement forecasts
KALMAR, free cash flow map, MEUR 2013A 2014E 2015E 2016E 2017E 2018E
NOPLAT 48 41 79 84 78 82
Depreciation, amortization and impairment (+) 42 45 39 40 41 42
Gross free cash flow 91 86 118 124 119 124
Capex (-) 37 55 55 55 55 55
Change in NWC (-) -36 -7 7 9 12 8
Free cash flow 90 39 56 60 52 60
Kalmar, Income statement MEUR 2013A 2014E 2015E 2016E 2017E 2018E
Total sales 1550 1385 1440 1512 1603 1667
Operating expenses -1442 -1285 -1296 -1361 -1459 -1517
EBITDA 106 100 144 151 144 150
Depreciation, amortization and impairment -42 -45 -39 -40 -41 -42
EBIT excluding restructuring costs 64 55 105 111 103 108
34
Cargotec press release, 15 October, 2014
Figure 38, Kalmar's operating invested capital and ROIC %
Source: Analyst projections, company data
Source: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 21/35
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
50
100
150
200
250
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
14Q3
Sales m€ EBIT margin %
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
0
100
200
300
400
500
600
700
800
900
1000
Sales m€ EBIT margin %
Figure 40, Quarterly sales and EBIT margin %, Hiab
Figure 39, Annual sales and EBIT margin %, Hiab
0
200
400
600
800
1000
1200
Hiab orders received
Hiab: Profit improvement programme proceeds as planned
If Kalmar and MacGregor posted promising growth figures in Q3 2014, Hiab did
not impress in a similar way. Sales nearly stagnated with only 1% growth Y-o-Y
and 3% Y-o-Y growth during the first 9 months of the year. We expect sales to
reach 220 m EUR in Q4 and expect sales to grow roughly 1% to 849 million EUR
in 2014. Orders received fell 3% in Q3 Y-o-Y but orders received during the first 9
months in 2014 increased 8% Y-o-Y. Increase in orders received should be seen
in sales figures already in Q4 and further in the first half of 2015 as the orders to
sales lead time in the segment is typically less than 6 months. Consequently, this
gives support to our expectations of the quarter-on-quarter sales increase already
in Q4 (220 m EUR vs. 200 m EUR). Going forward, we expect sales growth to be
2% in 2015 due to the uncertainty in European economy, which is the main market
for Hiab (52% of sales in 2013 came from EMEA). We expect sales to pick up in
2016 and 2017 with 4% and 5% respective growth supported by the expected
growth in construction output and truck sales as well as increased growth in APAC
region.
Similarly as in Kalmar segment, Cargotec also initiated profitability improvement
programme in Hiab segment. As can be seen from the figure 40, this started to
pay off already in Q1 2014 with EBIT margins substantially higher than earlier.
Hiab has managed to improve its EBIT margin from less than 2% in Q4 2013 to
7% in Q3 2014 through improved design-to-cost35
, consolidation of supplier base,
and pricing. We expect this to continue in Q4 with 6% EBIT margin and forecast
EBIT margin to reach 6% in 2014, and improve further through Hiab’s additional
actions to improve supply chain, distribution network and ramp up Hiab’s new
multi-assembly unit in Poland which will reduce the production costs e.g. through
energy and material savings. Consequently, we expect EBIT margin to increase to
7% in 2015, and to 8% in 2016 and 2017.
Table 7 shows our expectations on the free cash flows of Hiab segment. We
expect free cash flow to be positive at around 45 million EUR level until 2018.
Capital expenditures in the segment are relatively low due to the consolidation of
distribution to Metz (France) and production to Stargard (Poland), both of which
Hiab shares with Kalmar segment. In addition, as a part of consolidation
campaign to reduce costs further Hiab is ramping down its production in Sweden
35
process to design a product with optimal cost-to-value ratio
Figure 41, Hiab order history
Source for figures 39-41: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 22/35
Source: Analyst projections, Bloomberg, Marketnoze
0
100
200
300
400
500
600
-10%
-5%
0%
5%
10%
15%
20%
Operating invested capital
ROIC %
WACC %
(operations will end in Q1 2015) and has outsourced dealerships and service
networks. Also Hiab has “destroyed value” with its ROIC % being lower than
WACC % which has been due to a low profitability in the segment. ROIC % is
expected to surpass WACC % from 2014 onwards.
Table 7, Hiab free cash flow & income statement forecasts
Hiab, free cash flow map, MEUR 2013A 2014E 2015E 2016E 2017E 2018E
NOPLAT 18 40 47 56 59 54
Depreciation, amortization and impairment (+) 21 20 16 16 16 17
Gross free cash flow 39 60 63 72 75 71
Capex (-) 8 20 20 20 20 20
Change in NWC (-) -48 -5 3 5 7 6
Free cash flow 80 45 40 47 48 45
Hiab, Income statement, MEUR 2013A 2014E 2015E 2016E 2017E 2018E
Total sales 841 849 866 901 946 983
Operating expenses -795 -776 -788 -810 -851 -895
EBITDA 45 73 78 90 95 89
Depreciation, amortization and impairment -21 -20 -16 -16 -16 -17
EBIT excluding restructuring costs 24 54 62 74 78 72
Valuation Our expected 26.1 EUR per share YE 2015 share price target is obtained
applying a discounted cash flow method. In addition to our base case scenario
we have also considered additional scenarios to take uncertainties on oil prices
and its impact on Cargotec’s MacGregor segment into account.
Cargotec vs. industry peer group
At the moment, Cargotec trades at a 28.3% premium to its industry peers in
terms of P/E with a P/E of 23.6 vs. median 18.4 of peers. We believe that the
reason to this premium is two folded. Firstly, despite of the worries over the
global economic growth especially in the Euro area and in the emerging markets,
Cargotec has not lowered its guidance but delivered a relatively strong Q3 2014
report. During autumn 2014, Cargotec’s peers such as Palfinger and Terex
lowered their guidance for 2014 due to the slow growth in the economy and this
has lowered their valuations. In addition to this, Cargotec has proofed during
2014 and especially in Q3 2014 that it has managed to turn Hiab and Kalmar
segments around and has improved their profitability dramatically. We believe
Figure 42, Hiab's operating invested capital and ROIC %
Figure 43, Industry peers vs. Cargotec P/E ratio forecasts
Source: Analyst projections, company data
Source: Analyst projections, company data
CARGOTEC COMPANY REPORT
PAGE 23/35
Figure 45, WACC components
0%
1%
2%
3%
4%
5%
10
/04
8/0
5
6/0
6
4/0
7
2/0
8
12
/08
10
/09
8/1
0
6/1
1
4/1
2
2/1
3
12
/13
Figure 46, German 10 year bund yield %
Figure 44, Industry peers vs. Cargotec EV/EBITDA ratio forecasts
Source: Analyst projections, Bloomberg, Marketnoze
Source: Bloomberg
Source: Analyst projections
that this has given investors confidence that recently weak MacGregor can be
turned around as well. We currently hold a P/E target of 15.2 for Cargotec in
YE2015 which is roughly in line with the projected median of its peers. Our target
of 8.9x for EV/EBITDA for YE2015 is -2.9% below peer group median of 9.2x.
See full peer comparison table in appendix 5.
Weighted average cost of capital
Cost of equity
Cargotec’s cost of equity is estimated by using capital asset pricing model
(CAPM)36
. For the market risk premium, there are multiple ways - such as
historical and regression based estimations - to calculate it. We have used 5.5%
which is seen as a reasonable estimate according to Koller, Goedhart and
Wessels37
. Our estimate for risk-free rate is 2.9% and is based on an average
rate of German 10 year government bond for the past 10 years. We believe that
the current risk-free rate of less than 1% is abnormally low and does not reflect
risk-free rate going forward. Cargotec’s beta is derived from the unlevered betas
of Cargotec’s comparable companies and re-levered back according to
Cargotec’s target D/E level which is 50%. This results an equity beta of 1.438
.
Combining all these pieces gives us a cost of equity of 10.4%.
Cost of debt
Regarding the cost of debt, it would be too simplistic to use Cargotec’s current
interest rates that it pays for its debt. For valuation purposes, cost of debt needs
to reflect future borrowing costs and thus needs to be estimated from the data
that is available. This can be done by using a credit rating and credit spread over
risk free rate and derive the cost of debt from there. Cargotec does not have a
credit rating but we have estimated credit rating according to the information we
presented earlier in the chapter where we analysed Cargotec’s leverage. As we
concluded, Cargotec would most likely be rated somewhere between BBB and
BB. To compromise, we use BB+ industrial corporate bonds’ spread as a proxy
for Cargotec’s credit spread. According to the figure 47, spread for 10 year BB+
bond is 2.48%.39
Hence, adding 2.9% + 2.48% would imply a cost of debt of
5.38%. Incorporating possibility of default into cost of debt calculations, we need
to take into account Cargotec’s default probability and possible recovery rate. As
36
CAPM formula: return on equity = risk free + beta of equity*(market return – risk free) 37
Tim Koller, Marc Goedhart, David Wessels, Valuation – measuring and managing the value of companies, 4th edition
38 See appendix 2 for beta computations
39 bondsonline.com – corporate bond spreads
CARGOTEC COMPANY REPORT
PAGE 24/35
Figure 47, Industrial corporate credit spreads (bps)
Source: Bondsonline.com
Source: St. Louis Fed
0
20
40
60
80
100
120
140
160
Crude oil prices (WTI)
Figure 48, Oil price development 2000-2015
a proxy for default rate, we use 47% which has been the average recovery rate
for US senior unsecured corporate bonds.40
From this we can calculate the
implied default probability41
which gives us implied probability of default of 1.2%.
Finally, to get the cost of debt, we use following formula: prob. of default ∗
Recovery rate + prob. of no default ∗ yield %, which gives us a cost of debt of
5.9%. After having cost of equity and cost of debt, we can calculate WACC42
by
using Cargotec’s target E/V of 70% and target D/V of 30% gives us a WACC of
8.6%.
Consolidated discounted cash flow valuation
We have forecasted free cash flows on a segment level until 2023 and summed
them together to come up to consolidated free cash flows from 2014 to 2023 (see
appendix 3). After the forecasted period, terminal growth rate of our forecasts is
estimated to be 2.3% which is based on the Dupont analysis.43
Based on the
base case discounted cash flow valuation, YE2015 enterprise value is 2464
million EUR and deducting our projection for Cargotec’s net debt of 739 million
EUR gives equity value of 1719 million EUR. Dividing this with the number of
outstanding shares (64.4m) gives share value of 26.7 EUR per share for YE2015.
Scenario analysis: MacGregor and oil price development
As mentioned earlier, Cargotec’s MacGregor segment has been performing poorly
during recent quarters. What used to be the best performing segment is now one
reason to worry for investors. Importance of MacGregor is further demonstrated
by the fact that it contributes most to the overall valuation of Cargotec and hence
our assumptions that MacGregor will start performing better in the future is crucial
for our price target for Cargotec.
Currently around 30% of MacGregor’s sales come from offshore industry. Main
drivers of the offshore industry are the development of global energy demand and
oil price. Oil price has recently declined substantially from 100 USD per barrel in
July 2014 to current mid-50’s USD per barrel. This raises questions on how it will
have an impact on MacGregor segment. To explore this, we have considered
three different oil price scenarios from U.S. Energy information administration
40
Credit risk teaching notes, Joao Pedro Pereira, March 24, 2014 41
Formula used: Spread
(1+risk−free+spread)∗(1−Recovery rate)
42 Formula used: re ∗
E
V+ rd ∗
D
V
43 Formula used: ((net income-dividends)/net income)*(net income/sales)*(sales/total assets)*(total assets/equity)
CARGOTEC COMPANY REPORT
PAGE 25/35
0
50
100
150
200
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
20
20
20
23
base case high oil price
low oil price
Figure 50, Oil price scenarios
Source: U.S. Energy information administration
Figure 49, Oil price impact on MacGregor's sales
Figure 51, Oil price impact on MacGregor's EBIT
Source: Analyst projections
Source: Analyst projections
0
500
1000
1500
2000
High price scenario
Base case scenario
Low price scenario
0
50
100
150
200
High price scenario
Base case scenario
Low price scenario
annual energy outlook 201444
and the impact on those scenarios on MacGregor’s
sales and subsequently on EBIT development and valuation. First scenario is a
base case scenario where average annual oil prices hover around $80-$90 per
barrel until 2017 and then start to rise modestly until 2023. As this is the base
case scenario, this has no impact on our expectations on sales, we expect
offshore to contribute 1-2% sales growth from 2015-2023. We give 50%
probability that base case scenario will play out. High oil price scenario would
imply that oil price rises substantially from 2015 onwards to $130 per barrel and
then further to around $150 per barrel by 2023. With high oil price scenario, our
expectation would be that MacGregor sales would get a 2% boost from 2016
onwards (long lead times in the segment would not change 2015 expectations)
from the increased offshore exploration spending which could reach 150 billion
USD instead of projected 106 billion USD by 2020. With current oil price decline,
we give 5% chance of this scenario playing out. Low oil price scenario suggests
that oil price stays at around $70’s per barrel until 2023. We expect that this would
impact negatively on sales and have initially a -2% impact on sales in 2016 and
2017, and then have a -1% annual impact from 2018 to 2023 due to the declining
demand from offshore exploration spending which we would expect to decrease to
65 billion USD by 2020 bringing a -1.5% annual decline to current 70 billion USD.
We expect that this scenario has 45% probability.
Table 8, oil price impact projections
Oil price
Annual impact on base sales
2016-2018
Annual impact on base sales
2019-2023
Offshore exploration
spending estimate 2020
Offshore exploration
spending growth p.a. until 2020
High price (5% probability) 2% 2% 150 billion USD 16.5%
Base case (50% probability) 0% 0% 106 billion USD 8.7%
Low pice (45% probability) -2% -1% 65 billion USD -1.5%
As can be seen from the figure 52, oil price scenarios have a material impact on
Cargotec’s overall valuation. Under the high price scenario, share target for 2015
would increase to 30.8 EUR per share and MacGregor’s enterprise value would
increase to 28.1 EUR per share. Under the low oil price scenario, share target for
2015 would decline to 24.9 EUR per share and MacGregor’s enterprise value
would decline to 19.9 EUR per share. Multiplying each scenario share price
44
U.S. Energy information administration
Source: Analyst projections
CARGOTEC COMPANY REPORT
PAGE 26/35
37.4 26.1
-3.8 -11.2
-0.1
8.6
11.0
21.6
HIAB KALMAR MACGREGOR Corporateadmin
Enterprisevalue
Net debt Minority share Fair value
Figure 52, Oil price impact on valuation
30.8 28.1 26.6
22.4 24.9
19.9
Cargotec equity value YE2015 MacGregor EV YE2015
High price scenario Base case scenario Low price scenario
with its corresponding probability and summing up results together gives
expected share price of 26.1 for Cargotec.
.
Sum-of-the-parts valuation
In order to get a better picture in what role segments play in the overall valuation
of Cargotec, it is important to take a look at the sum of the parts valuation. This
shows that Hiab segment’s enterprise value is 8.6 EUR per share. Hiab is
consequently the least contributing segment to the overall value of Cargotec which
is due to a relatively low profitability and lowest sales levels out of three segments.
Kalmar’s valuation shows that it is valued at 11.0 EUR per share. High level of
Capex is eating Kalmar’s valuation - segment has clearly the highest capital
expenditure level out of the three segments for the reasons described earlier.
Finally, MacGregor sports the highest valuation with 21.6 EUR per share.
MacGregor’s valuation is boosted by low capex and good management of net
working capital. Costs that could not be allocated reliably into segments were
allocated to corporate administration “segment”, which decreases the overall
valuation by 3.8 EUR per share. Total enterprise value of combined segments is
thus 37.4 EUR per share. Deducting net debt and minority share gives a fair value
of 26.1 EUR per share.
Sensitivity analysis on WACC and horizon growth rate
As the perpetuity makes roughly 50% of Cargotec’s valuation, our target share
price is highly sensitive to the 2.3% value we implied for the horizon growth rate
Source: company data, analyst projections
Source: Analyst projections
Figure 53, sum-of-the-parts valuation
CARGOTEC COMPANY REPORT
PAGE 27/35
Source: company data, analyst projections
Figure 54, WACC % and horizon growth rate % sensitivity analysis
Source: Analyst projections
from the Dupont analysis. Another input that has a big impact on the valuation is
WACC %. We checked how sensitive Cargotec’s valuation is to these two
components, WACC % and horizon growth rate % “g”. In the figure 54 below,
horizon growth rate ranges from 1.5% to 3.5% and WACC % ranges from 7.5% to
10%. As can be seen, share price ranges from 21.0 EUR per share to 37.3 EUR
per share which demonstrates the sensitivity of Cargotec’s value to these
assumptions.
To sum up, based on our analysis, it is clear that in addition to our WACC % and
horizon growth rate % assumptions, Cargotec’s price target is dependent on the
success of the ongoing efficiency programmes and operating environment,
especially in MacGregor segment which contributes almost 58% of Cargotec’s
enterprise value. As can be seen from the table 9, MacGregor EV/EBITDA and
EV/EBIT ratios for YE2015 are substantially higher than those of Kalmar and
Hiab, indicating high expectations of the improvement in the EBITDA and EBIT
after 2015. Indeed, our expectations for the profitability improvement in
MacGregor are highest during 2016-2018 whereas in Kalmar and Hiab we expect
a clear improvement in profitability already in 2015 due to the earlier launch of
efficieny programs in those segments. Cargotec currently trades at 25.1 EUR per
share which less than 4% lower than our YE2015 price target of 26.1 EUR per
share. This means that based on our view, current price reflects market’s
expectations on Cargotec’s ability to improve the performance of its segments
and is hence vulnerable to any operational underperformance going forward.
Valuation summary YE2015
Segment Value (EUR m) % of total EV EUR/share 2015E EV/EBITDA (x) 2015E EV/EBIT (x) 2015E P/E (x)
MacGregor 1390 57.7% 21.6 15.9 18.7
Kalmar 706 29.3% 11.0 4.9 6.7
Hiab 556 23.1% 8.6 7.1 9.0
Corporate administration -244 -10.1% -3.8
Total enterprise value 2408 100.0% 37.4 8.9 12.2
Net debt -723 -11.2
Minorities -6.3 -0.1
Total equity value 1679 26.1 15.2
Total number of shares outstanding (million) 64.4
Table 9, Valuation summary
CARGOTEC COMPANY REPORT
PAGE 28/35
Appendices
Appendix 1: Acquisition history since Cargotec went public45
2005
All Set Marine Lashing 08-Jul-05
Consolis 21-Sep-05
2006
AMA 26-Jan-06
East Coast Cranes and Electrical Contracting Inc. 16-Mar-06
BMH Marine AB 12-Jun-06
Grampian Hydraulics 11-Aug-06
African National Engineering 01-Sep-06
Catracom 14-Sep-06
Kalmar España S.A. 18-Dec-06
2007
Tagros d.o.o. 15-Jan-07
Berger 17-Jan-07
Truck och Maskin i Örnsköldsvik AB 29-Jan-07
BG Crane Pty. Ltd. 30-Jan-07
Port Equipment Service, Inc. 02-Feb-07
Indital Construction Machinery Ltd. (Indital) 14-Feb-07
Vietnam Shipbuilding Industry Group (Vinashin) 06-Mar-07
Hydramarine AS 15-Mar-07
Plimsoll Corporation Pte Ltd 29-Mar-07
Vestnorsk Hydraulikkservice AS (VNH) 14-May-07
Balti ES 30-May-07
Bay Equipment Repairs Inc. 13-Jul-07
Advanced Cargo Transhipment B.V. (ACT) 28-Aug-07
2008
O’Leary’s Material Handling Services 20-Feb-08
DEL Equipment (UK) Limited and Ultron Lift Corp. 27-Feb-08 South African Bowman Cranes (Pty) Ltd 01-Apr-08
Platform Crane Services International Inc (PCS) 10-Apr-08 Zepro Tailgate (1987) Ltd 17-Jun-08
Equipos y Servicios para Terminales y Puertos SRL (ESTP) 11-Aug-08
80% of CVS Technoports S.r.l. and CVS Service S.r.l. 03-Nov-08
2009
Danish sales and services company 19-Aug-09
Sales and service business in Morocco 11-Dec-09
2010
Waltco Hydraulics 07-Jan-10
Hallberg-Ivarsson Hydraulik & Påbyggnad AB 15-Nov-10
Kalmar (Malaysia) Sdn.Bhd. 15-Dec-10
2011
Navis 31-Jan-11
2012
Automation technology and expertise from Asciano 29-Jun-12
2013
Spanish Mareiport 07-May-13
Hatlapa Group 16-Jul-13
Aker Solutions' mooring and loading systems unit 30-Oct-13
2014
Deep Water Solutions AS 27-Feb-14
45
Company data, www.cargotec.com
THIS REPORT WAS PREPARED BY MATIAS PARIKKA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS
REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 29/35
MASTERS IN FINANCE
EQUITY RESEARCH
Appendix 2: Beta calculations
Cargotec beta calculations
Company Beta levered Debt to Equity Tax rate Beta unlevered Cargotec
Palfinger 1.24 0.44 0.25 0.93 Target D/E 50%
Terex 2.25 0.55 0.35 1.65 Tax rate 24.50%
Konecranes 1.28 0.22 0.25 1.09 Relevered beta 1.4
Rolls-royce 0.75 0.33 0.21 0.60
Mitsubishi heavy industries 1.05 0.60 0.36 0.76
Sany heavy industries 1.80 1.12 0.25 0.91
Average 1.38 0.54 0.28 0.99
Source: Analyst projections, Bloomberg, Company data, KPMG
Formulas: Beta unlevered = Beta levered / (1 + (1 - tax rate) * target D/E) Beta levered = Beta unlevered + (1 - tax rate) * target D/E * Beta unlevered
THIS REPORT WAS PREPARED BY MATIAS PARIKKA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 30/35
MASTERS IN FINANCE
EQUITY RESEARCH
Appendix 3: Consolidated Free cash flow projections (base case)
Consolidated free cash flow map, MEUR 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Horizon
Year 0 1 2 3 4 5 6 7 8 9
Net sales 3223 3395 3545 3715 3852 4006 4139 4263 4391 4523
EBIT 130 197 240 249 262 264 257 255 245 254
Notional income tax -32 -48 -59 -61 -64 -65 -63 -62 -60 -62
Tax adjustment -2 -2 -2 -2 -2 -2 -2 -2 -2 -2
NOPLAT 96 147 179 186 196 197 192 190 183 189
Depreciation, amortization and impairment 76 73 74 75 76 77 78 79 80 81
Gross free cash flow 173 220 253 261 272 275 270 270 263 270
Change in NWC (-) -70 1 15 19 15 15 12 12 13 13
Capex (-) 211 95 95 95 95 95 95 95 95 95
Free cash flow 32 124 143 148 163 165 163 162 155 162 166
Discounted Free cash flow 32 114 121 115 117 109 99 91 80 77 1240
Horizon growth rate 2.3%
Target D/V 30.0%
Target E/V 70.0%
WACC 8.6%
Number of shares (million) 64.4
Appendix 4: Share price targets (base case)
Share targets 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Value of operations 2164 2226 2275 2324 2361 2400 2444 2493 2553 2611
Non-operating assets 525 554 578 606 628 653 675 695 716 737
Non-operating liabilities -300 -315 -327 -339 -350 -361 -372 -382 -392 -402
Net non-operating assets (+) 226 238 251 266 279 292 303 313 324 336
Enterprise value 2389 2464 2526 2590 2640 2692 2747 2806 2877 2947
Net Debt @ market 717 739 758 777 792 808 824 842 863 884
Excess cash 229 242 252 264 274 285 295 303 313 322
Interest bearing debt @ market 946 981 1010 1041 1066 1093 1119 1145 1176 1206
Minority share 6 6 6 6 6 6 6 6 6 6
Equity @ market 1666 1719 1762 1807 1842 1878 1917 1958 2008 2056
Target price per share 25.9 26.7 27.3 28.0 28.6 29.2 29.8 30.4 31.2 31.9
E/V 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%
D/V 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
D/E 43% 43% 43% 43% 43% 43% 43% 43% 43% 43%
P/E 26.9 15.6 12.4 12.2 11.8 12.0 12.7 13.2 14.4 14.2
P/B 1.46 1.51 1.52 1.53 1.53 1.54 1.55 1.57 1.60 1.63
EV/EBITDA 11.6 9.1 8.1 8.0 7.8 7.9 8.2 8.4 8.9 8.8
EV/EBIT 18.4 12.5 10.5 10.4 10.1 10.2 10.7 11.0 11.8 11.6
EV/Sales 0.74 0.73 0.71 0.70 0.69 0.67 0.66 0.66 0.66 0.65
Dividend payout ratio 55% 55% 55% 60% 60% 65% 65% 70% 75% 80%
Dividend (m€) 34.0 60.7 77.9 88.5 93.9 102.1 97.8 103.7 104.5 115.9
Dividend per share 0.5 0.9 1.2 1.4 1.5 1.6 1.5 1.6 1.6 1.8
Dividend yield % 2.7% 2.0% 3.4% 4.3% 4.8% 5.0% 5.3% 5.0% 5.2% 5.1%
THIS REPORT WAS PREPARED BY MATIAS PARIKKA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS
REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 31/35
MASTERS IN FINANCE
EQUITY RESEARCH
Appendix 5: Benchmarking versus industry peers
P/E EV/EBIT EV/EBITDA EV/Sales EBITDA margin % EBIT margin % Dividend yield %
Net debt/EBITDA EBIT
interest coverage
Market cap
Company 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2014E 2014E 2014E
KONE 24.9 22.8 16.2 14.1 14 12.4 2.1 1.9 15.2% 15.4% 14.1% 14.4% 2.9% -1.1 28.4 16929
Konecranes 18.4 14.8 13.5 11.7 10.5 9.7 0.8 0.8 8.1% 8.4% 5.7% 6.7% 4.4% 1.3 7.8 1513
Metso 14.1 14.2 9.8 9.5 9.1 9.4 1.3 1.3 12.9% 13.6% 11.9% 12.0% 4.0% 1.7 13.1 3710
Outotec 26.3 17.2 22.8 14.5 8 5.7 0.5 0.4 6.3% 7.8% 3.4% 5.6% 4.6% -1.3 3.9 831
Wärtsilä 16.8 15.5 13.3 11.9 10.9 9.9 1.6 1.5 14.4% 15.0% 11.7% 12.5% 3.0% 0.3 13.2 7343
Valmet 34.4 17.2 16 9.3 11.2 7.6 0.6 0.6 5.4% 7.6% 2.7% 4.9% 2.0% 0.1 4.0 1564
Kesla 12.2 6.4 15.7 13.6 5.5 4.1 0.4 0.4 7.1% 9.6% 3.0% 5.0% 2.8% 3.1 1.5 12
Ponsse 12.1 12.5 13.2 11.5 8.7 7.7 1 1 11.7% 12.4% 9.6% 10.0% 3.0% 1.2 3.7 335
Vacon 30.4 26.3 10.7 9.5 16.7 13.5 2.4 2.2 14.7% 16.6% 11.2% 12.7% 3.8% -0.1 7.9 1040
Palfinger 20.5 13.7 17.4 13.3 11.0 9.2 1.1 1.0 9.7% 10.8% 6.4% 7.5% 1.8% 3.4 6.2 785
Terex 12.3 10.4 8.94 7.5 6.7 6.0 0.6 0.58 9.0% 9.5% 6.8% 7.5% 0.4% 2.4 5.1 2493
Average 20.2 15.5 14.3 11.5 10.2 8.7 1.1 1.1 10.4% 11.5% 7.9% 9.0% 3.0% 1.0 8.6 3323
Median 18.4 14.8 13.5 11.7 10.5 9.2 1.0 1.0 9.7% 10.8% 6.8% 7.5% 3.0% 1.2 6.2 1513
Cargotec 23.6 15.2 18.4 12.2 11.6 8.9 0.7 0.7 6.4% 7.9% 4.0% 5.8% 2.7% 3.5 2.3 1678
Premium to mdn. 28.3% 2.9% 36.4% 4.3% 10.5% -2.9% -25.9% -26.7% -34.1% -26.4% -41.0% -22.8% -11.4% 192.5% -62.5% 10.9%
Premium to avg. 16.7% -2.1% 28.5% 6.2% 13.4% 3.2% -34.1% -31.6% -38.5% -31.1% -48.9% -35.5% -10.3% 247.9% -73.1% -49.5%
Source: Bloomberg, Market noze consensus estimates, Analyst estimates
CARGOTEC COMPANY REPORT
PAGE 32/35
Financials Consolidated statement of income (base scenario), MEUR 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Sales 3181 3223 3395 3545 3715 3852 4006 4139 4263 4391 4523
Operating expenses -3012 -3016 -3126 -3232 -3391 -3514 -3664 -3804 -3929 -4066 -4188
EBITDA 169 206 270 314 324 338 342 335 334 325 335
Depreciation, Amortization and impairment -77 -76 -73 -74 -75 -76 -77 -78 -79 -80 -81
EBIT (excluding restructuring costs) 93 130 197 240 249 262 264 257 255 245 254
Financing expenses -23 -56 -58 -60 -62 -63 -65 -66 -68 -69 -71
Financing income 9 8 7 7 8 8 8 9 9 9 10
Profit before taxes 79 82 146 187 195 207 208 199 196 185 192
Taxes -23 -20 -36 -46 -48 -51 -51 -49 -48 -45 -47
Net profit 55 62 110 142 148 156 157 151 148 139 145
EPS 0.90 0.96 1.71 2.20 2.29 2.43 2.44 2.34 2.30 2.16 2.25
CARGOTEC COMPANY REPORT
PAGE 33/35
Consolidated balance sheet (base scenario), MEUR 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Assets
Fixed assets 1395 1529 1551 1571 1591 1609 1627 1643 1659 1673 1687
Other non-current assets 107 77 81 85 89 92 96 99 102 105 108
Inventory 631 693 732 765 801 830 863 892 919 947 975
Accounts receivable and other non-interest bearing assets 691 648 683 713 747 774 805 832 857 883 909
Deferred tax assets 139 141 148 155 162 168 175 181 186 192 197
Cash and cash equivalents 306 234 247 258 270 280 291 301 310 319 329
Other non-operating current assets 68 78 83 86 90 94 98 101 104 107 110
Total assets 3,336 3,400 3,524 3,632 3,750 3,847 3,954 4,048 4,136 4,225 4,315
Equity & Liabilities
Total equity 1240 1141 1142 1161 1184 1204 1223 1237 1249 1257 1265
Of which non-controlling interest 6 6 6 6 6 6 6 6 6 6 6
Deferred tax liabilities 56 50 53 55 58 60 62 65 66 68 71
Interest bearing debt 885 946 981 1010 1041 1066 1093 1119 1145 1176 1206
Advances received 197 294 312 325 340 352 366 379 390 402 414
Accounts payable and other non-interest-bearing liabilities 728 719 775 809 845 876 911 942 970 999 1029
Other interest free debt 231 250 262 272 281 289 299 308 315 323 331
Total liabilities 2,096 2,259 2,383 2,471 2,566 2,643 2,731 2,811 2,887 2,968 3,051
Total equity and liabilities 3,336 3,400 3,524 3,632 3,750 3,847 3,954 4,048 4,136 4,225 4,315
CARGOTEC COMPANY REPORT
PAGE 34/35
CONSOLIDATED, free cash flow map (base scenario), MEUR 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Net sales 3181 3223 3395 3545 3715 3852 4006 4139 4263 4391 4523
EBIT 93 130 197 240 249 262 264 257 255 245 254
Notional income tax -23 -32 -48 -59 -61 -64 -65 -63 -62 -60 -62
Tax adjustment -6 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2
NOPLAT 64 96 147 179 186 196 197 192 190 183 189
Depreciation, amortization and impairment (+) 77 76 73 74 75 76 77 78 79 80 81
Gross free cash flow 140 173 220 253 261 272 275 270 270 263 270
Change in NWC (-) -15 -70 1 15 19 15 15 12 12 13 13
Capex (-) 146 211 95 95 95 95 95 95 95 95 95
Free cash flow 9 32 124 143 148 163 165 163 162 155 162
Change in other non-operating assets (-) 219 -102 13 13 15 12 13 11 11 11 11
Financing income (+) 9 8 7 7 8 8 8 9 9 9 10
Total free cash flow available to investors -201 141 119 138 140 159 160 161 161 153 160
Cash flow from funding 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Financing expenses -23 -56 -58 -60 -62 -63 -65 -66 -68 -69 -71
Tax shield 6 14 14 15 15 15 16 16 17 17 17
Change in net financial debt (+) 91 132 23 19 19 15 16 16 18 21 21
Change in equity (+) 128 -231 -98 -111 -113 -126 -127 -128 -127 -122 -128
Total cash flow from funding 201 -141 -119 -138 -140 -159 -160 -161 -161 -153 -160
THIS REPORT WAS PREPARED BY MATIAS PARIKKA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 35/35
MASTERS IN FINANCE
EQUITY RESEARCH
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by Matias Parikka, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.